The non-dischargeable debts, and How to Discharge Some of Them
The normal reason for a creditor to contest a bankruptcy is the debtor is attempting to discharge one of the non-dischargeable debts from section 11 United States Code 523 of the bankruptcy code. Seven major debts cover the majority of these problems. Almost every so called non-dischargeable debts can be discharged or managed under the right circumstances. Often you just need to properly plan and file the bankruptcy.
Child Support and Alimony are non-dischargeable but payable debts
Child Support and alimony can be repaid in a Chapter 13 bankruptcy but it is not “discharged”. Filing a bankruptcy does not even delay the child support or alimony case in state court. By statute Child Support and Alimony matter pass through a bankruptcy case generally unaffected. But judges don’t care how you pay the child support they normally just want you to pay it. In a Chapter 13 you can pay the child support or alimony at the expense of other creditors and in some cases pay 0 to the unsecured debt to insure support is paid. .
Income Taxes over 3 years old are dischargeable in bankruptcy!
To be dischargeable, income taxes must be 3 years old, you must have filed returns at least 2 years ago and there must be no assessments within 240 day. Other tolling events that may extend the waiting periods include prior bankruptcy cases, an offer in compromise and any fraud or improper efforts to delay collection.
Bankrupting income tax debt is largely a timing issue. You can easily discharge the unsecured, non priority part of the tax debt. And you can value the liens on homes in bankruptcy to reduce the amount owed and pay taxes over time. In a Chapter 13 bankruptcy taxes penalties and interest on the unsecured tax debt is treated as unsecured debt. See the tax portion of our website for a full explanation.
Federally Guaranteed Student Loans are at worst manageable debt and sometimes discharged
Student loans can be managed by a bankruptcy. You can stop the collections for years and pay little or nothing in a Chapter 13. You can also force them to become what should be affordable putting them into rehabilitation and consolidation. Income based repayment plans are possible. But you often have to file an adversary proceeding to get this to work.
If student loans are an undue hardship the judge should allow you to discharge the debt in an adversary proceeding. An undue hardship is when you cannot afford food shelter clothing and medical care. Filing an adversary proceeding is a lot of work but if you qualify, deserving debtors earn the discharge close to 50% of the time.
The Brunner test
The rules for student loans changed in October 1998 and 2005. Bankruptcy now only allows undue hardship discharges. The Bankruptcy court considers 3 factors: a). Whether you made good faith efforts to repay (not required if you never had the money) b) Your ability to repay now and in the immediate future. c) Whether it creates hardship to your family if you repay. You normally need to file for the Ford income based repayment loan program prior to filing to be considered for a hardship discharge. Being denied is a basis for an undue hardship discharge.
Partial discharges are more common than complete discharges. Three studies show that persons who qualify under brunner and attempt the adversary proceeding will get a discharge almost 50% of the time. Most attorneys don’t know how to file an adversary. Even if they know how it is 5-10,000 dollars of work and if you are not paying him to do it most people cannot afford to work for free. That is why many people obtain these discharges on their own.
An Example of a Hardship Discharge
In one case an attorney owed child support to two women. Taxes took 50% of his income. The two mothers took another 40%. There was literally nothing left if child support was paid. The attorney filed bankruptcy and an adversary to discharge the student loans. The argument was he could support the children or pay the student loans. Both the bankruptcy judge and the US attorney were female filing divorce cases and seeking child support. He discharged 120,000 of the 150,000 in debt. The remaining 30,000 was placed into an IBR
An Example of managing Student Loan Debt in a Chapter 13
Bill owes 50,000 to a private student loan and 30,000 to the Department of Education. He files a Chapter 13 and an adversary to discharge the federal student loan only. The Chapter 13 plan has a 0% repayment. The Private student loan is unpaid for 5 years and is charged off. Collections are never attempted again. The government loan is forced to grant an affordable IBR at a low or zero repayment or be discharged. See our page and section on How to manage student loans.
Debts due to theft or fraud.
Even if a debt had an elelment of fraud the debt may be dischargeable in a Chapter 13. Only relied on, proven, material and intentional financial misrepresentations are fraud in a Chapter 7. If banks make bad loans or failed to check facts it does not make debts non-dischargeable in bankruptcy. The lender has a hard burden to prove fraud.
Making Charges just before filing.
However, a charge or cash advance over about $950 or purchases over $675 for luxury items within 90 days before filing are assumed fraudulent so timing and amounts are important. This presumption does not have a bright line where it isn’t fraud if you are a dollar under and it is fraud if you are a dollar over. There are 21 factors the judge looks at to determine it. If you lose such a case you only have to repay the amount of the luxury goods or cash advance you charged just before filing. You still discharge the remaining amount on the card.
Criminal Acts and Intentional Injuries
Criminal acts and intentional injuries are non dischargeable in bankruptcy. However, if an injured person fails to file an adversary proceeding and object to the discharge it is often discharged in bankruptcy anyway. Bankruptcy won’t stop criminal courts from ordering criminal restitution. Bankruptcy is only a defense in Civil Court.
Drunken Driving Accidents.
You can get your license back from a civil judgment if you get a discharge in bankruptcy. Drunk driving accident victims must file adversary actions in bankruptcy court and prove drunk driving or chance being forever barred from collecting and you get your license back. (Learn how in the bankruptcy manual)
Marital Property Settlement Agreements
Filing a Chapter 13 normally eliminates your obligation to pay the marital property settlement if you properly structure the plan. Just listing a marital property settlement in a Chapter 7 won’t.
If you have non-dischargeable debts, list them anyway there are ways to bankrupt many of them and the expense of the debt must be accounted for in your budget. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable.
11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).